WEBVTT - Year-End Bloodbath Coming for Target, Amazon and Walmart, Mushkin Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.720 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well, 0:00:32.960 --> 0:00:35.400 we've had some mixed results out of retailers, but one 0:00:35.400 --> 0:00:38.360 really positive one was out of Target earlier today. The 0:00:38.479 --> 0:00:42.559 shares UH surged more than four percent initially, but have 0:00:42.680 --> 0:00:45.240 retraced some of those gains and are up a little 0:00:45.240 --> 0:00:47.440 bit more than three percent now. To give a better 0:00:47.479 --> 0:00:51.519 sense of what was driving the positive better than expected 0:00:51.520 --> 0:00:54.880 returns for Target and what this might mean for Walmart, 0:00:54.920 --> 0:00:57.800 is Scott Mushkin. He's managing director and senior staples retail 0:00:57.840 --> 0:01:02.200 analyst for Wolf Research in New York City. Scott first 0:01:02.560 --> 0:01:06.200 with Target, I mean, was there anything negative here or 0:01:06.319 --> 0:01:08.920 was this just, you know, unrelentingly a positive scene And 0:01:08.959 --> 0:01:12.160 how did they turn around their outlooks so much? Yeah? 0:01:12.160 --> 0:01:13.600 I mean I think if you look at the quarter, 0:01:13.640 --> 0:01:17.160 it was just straight out positive. Um, you know, as 0:01:17.200 --> 0:01:19.680 we look across our sector staples retail, and we also 0:01:19.720 --> 0:01:22.360 do some of the hardline names like home depot Um. 0:01:22.440 --> 0:01:25.040 People are just outperforming right now. The economy strong, we 0:01:25.160 --> 0:01:28.959 got low, very low unemployment rate, Wage growth has been percolating. 0:01:29.000 --> 0:01:31.679 The stock market everyone knows has been on fire. Housing 0:01:31.720 --> 0:01:34.000 markets good and so what we've been saying to people, 0:01:34.040 --> 0:01:37.080 if you're not doing well, now, when will you do well? 0:01:37.760 --> 0:01:39.360 But I would, you know, throw a little cold water 0:01:39.400 --> 0:01:41.360 on that. For Target, I mean, their numbers are still 0:01:41.400 --> 0:01:44.000 going to be down year over year, uh, their ebit, 0:01:44.520 --> 0:01:47.560 their earnings will be down. So you know, while it's 0:01:47.560 --> 0:01:49.760 definitely much better than they thought they were going to 0:01:49.800 --> 0:01:51.560 do at the start of the year, you know, Target 0:01:51.600 --> 0:01:54.720 does still face some significant headwinds in this business. And 0:01:54.760 --> 0:01:57.240 just to put perspective in stock gains today, the shares 0:01:57.240 --> 0:01:59.640 are still down about year to date. So this has 0:01:59.680 --> 0:02:02.400 been you know, you say, everybody has been doing well 0:02:02.440 --> 0:02:04.840 at least in the stock world. Targets certainly hasn't. Other 0:02:04.880 --> 0:02:08.239 retailers have also. Retailers have also gotten beaten up. Also 0:02:08.320 --> 0:02:10.720 coach I should mention as well as Dick Sporting Goods 0:02:10.720 --> 0:02:14.880 this week have gotten just crushed after worse than expected earnings, 0:02:14.919 --> 0:02:19.040 so it hasn't been a uniformly positive situation. I want 0:02:19.040 --> 0:02:23.240 to ask specifically about Targets online presence because this has 0:02:23.280 --> 0:02:27.160 been a huge challenge in its fight with Amazon, and 0:02:27.200 --> 0:02:29.400 can you give us an update on kind of how 0:02:29.480 --> 0:02:32.080 much it's adapted to an online format and what the 0:02:32.080 --> 0:02:34.520 growth has been like there. Yeah, I mean the growth 0:02:34.520 --> 0:02:37.320 has been really strong. I think they were up in 0:02:37.400 --> 0:02:41.160 the quarter um and you know they're you know, they're 0:02:41.160 --> 0:02:45.160 on a collision course. Targeting in Amazon a very significant one. 0:02:45.600 --> 0:02:48.840 One of the things Targets doing is Target Restock, which 0:02:48.919 --> 0:02:51.600 is consumable items. If you order it by two pm, 0:02:51.800 --> 0:02:54.480 you get it the next day, uh, for kind of 0:02:54.680 --> 0:02:59.000 reordable consumables. It's really right aimed at what Amazon is 0:02:59.040 --> 0:03:01.400 doing with Amazon Now out on Amazon next Day with 0:03:01.440 --> 0:03:05.120 their Prime membership and of course subscribe and save. And 0:03:05.280 --> 0:03:08.080 this is our caution with the space and and I 0:03:08.120 --> 0:03:09.960 think you said, you know, not everyone's doing well, and 0:03:09.960 --> 0:03:12.840 that's correct, but sales for a lot of people have 0:03:12.960 --> 0:03:15.240 gotten a little bit better. But the problem with that 0:03:15.440 --> 0:03:19.320 is it's costing a lot to generate those sales. And 0:03:19.360 --> 0:03:21.000 that's going to be the same thing with Target when 0:03:21.040 --> 0:03:23.080 they when they expand into e commerce. They go all 0:03:23.160 --> 0:03:28.160 these programs, same day delivery, stores doing delivery. The question 0:03:28.280 --> 0:03:31.959 is will Target make more money three years from now 0:03:32.000 --> 0:03:35.840 than it does today? And given the battle and suing 0:03:35.840 --> 0:03:38.960 with Amazon, battle and suing with Walmart, it's really hard 0:03:39.040 --> 0:03:41.040 to see that it's just going to cost more to 0:03:41.080 --> 0:03:44.000 do business. This is this is a really fascinating point. 0:03:44.000 --> 0:03:46.520 In other words, people say, well, they need to adopt 0:03:46.600 --> 0:03:50.240 the online reality of today, and yet to do so 0:03:50.720 --> 0:03:53.320 costs a lot of money. So you know, whether they 0:03:53.320 --> 0:03:56.840 can increase their sales enough to overcome and then some 0:03:57.360 --> 0:04:00.600 those costs is a big question. Mark can just get 0:04:00.640 --> 0:04:03.320 a little bit more granular about what the costs are. 0:04:03.440 --> 0:04:05.800 I mean, it wouldn't they rely on you know, a 0:04:05.880 --> 0:04:09.520 FedEx or UPS or US postal service, And I mean 0:04:09.760 --> 0:04:12.720 where where's the big costs going to come from? Yeah, 0:04:12.760 --> 0:04:14.680 I mean, I mean you nailed it with what you said, 0:04:14.760 --> 0:04:18.840 and so I mean the cost is basically, um, you're 0:04:18.839 --> 0:04:21.320 having to when customers used to drive to your store 0:04:21.400 --> 0:04:24.520 pick the stuff off them shulves the shelves themselves. Now 0:04:24.640 --> 0:04:26.880 what you have to do is either set up a 0:04:26.880 --> 0:04:30.479 whole distribution network to deal with them online or pick 0:04:30.560 --> 0:04:33.720 the stuff off the shelves yourself and either have them 0:04:33.720 --> 0:04:36.039 pick it up or send it out to them. I mean, 0:04:36.080 --> 0:04:39.520 the margin hit can be anywhere from you know, five 0:04:39.960 --> 0:04:43.479 basis points to you're not making any money. Uh, And 0:04:43.600 --> 0:04:48.000 this is really the challenge facing all retail. On top 0:04:48.040 --> 0:04:49.920 of it, everyone has too many stores. The stores are 0:04:49.920 --> 0:04:51.800 too big. I mean, you can go through the litany 0:04:51.839 --> 0:04:55.919 of challenges um and demographics is another challenge where we 0:04:55.960 --> 0:04:58.839 just don't have as many people having kids. So you know, 0:04:58.880 --> 0:05:00.920 Targets got a lot in front of it, a lot 0:05:00.960 --> 0:05:03.120 of tight But you got to hand it to the team. 0:05:03.120 --> 0:05:06.040 They're working really hard to address these things. It's just 0:05:06.360 --> 0:05:09.600 from an equity investor's perspective, or you're gonna have more 0:05:09.640 --> 0:05:11.479 money in your pocket in three years or less, it 0:05:11.520 --> 0:05:13.640 looks like it's going to be less. And that's why 0:05:13.640 --> 0:05:16.680 we remain pretty negative on the stock. So just looking ahead, 0:05:16.720 --> 0:05:20.000 So Walmart's going to be reporting earnings tomorrow and it 0:05:20.080 --> 0:05:22.960 shares her down just to touch less than two tents 0:05:22.960 --> 0:05:25.680 of a percent, And I just have to wonder whether 0:05:25.880 --> 0:05:28.440 Walmart's shared dip, if you can even call it, that 0:05:29.200 --> 0:05:32.320 is a direct response to targets positive earnings because there 0:05:32.320 --> 0:05:34.719 seems to be a sort of fixed pool that the 0:05:34.760 --> 0:05:37.600 two are fighting over and when one does better, the 0:05:37.640 --> 0:05:40.719 other is going to do worse. Is that a proper interpretation? 0:05:41.279 --> 0:05:43.120 I mean, I think that's a huge concern. Right, Like 0:05:43.120 --> 0:05:46.400 we've you know, we've seen Amazon report their sales are 0:05:46.400 --> 0:05:50.479 better than expected, targets sales are better than expected. Walmart 0:05:50.560 --> 0:05:52.640 I think is doing you know, decently. Well, I'm not 0:05:52.680 --> 0:05:56.560 sure that their sales have accelerated thus far this year. Um, 0:05:56.600 --> 0:05:59.120 you know, Walmart is really an interesting company where you know, 0:05:59.560 --> 0:06:03.279 invest is gravitated towards it so much this year. But 0:06:03.320 --> 0:06:05.720 if you look at the numbers, some fascinating numbers here 0:06:06.080 --> 0:06:09.680 EBITDA at Walmart, is actually looks like this year will 0:06:09.680 --> 0:06:11.400 be the same as it was in two thousand and 0:06:11.440 --> 0:06:13.880 eleven and net earnings the same as they were in 0:06:13.880 --> 0:06:17.120 two thousand and eight. Yet the stock is like thirty 0:06:17.160 --> 0:06:20.000 dollars higher. So what I've been saying to people is 0:06:20.000 --> 0:06:22.520 that company better ripped the kill not to cover off 0:06:22.520 --> 0:06:25.559 the ball tomorrow, or you probably have some downside because 0:06:25.600 --> 0:06:30.440 it's really seen significant equity appreciation and anticipation of a 0:06:31.040 --> 0:06:33.640 of a turnaround, and you know, we were made really 0:06:33.680 --> 0:06:35.320 cautious into the back half of the year on the 0:06:35.480 --> 0:06:39.479 entire space. As Amazon continues to add fulfillment centers, it's 0:06:39.520 --> 0:06:40.960 just going to be a blood bath as we get 0:06:41.000 --> 0:06:44.080 to your end, a blood bath within Walmart as well 0:06:44.080 --> 0:06:47.080 target the Walmart target and where you've even gotten a 0:06:47.080 --> 0:06:49.599 little bit more nervous around Amazon. We took our rating 0:06:49.640 --> 0:06:54.880 from out perform down to appear perform. It's just everybody's 0:06:54.920 --> 0:06:56.839 gearing up. We call it the clash of the Titans 0:06:56.880 --> 0:06:59.880 between Amazon and Walmart. But if you've been following anything, 0:06:59.880 --> 0:07:02.680 you know some of these small regional grocers they're adding 0:07:02.760 --> 0:07:05.359 online capabilities. I mean, this is just going to be 0:07:05.440 --> 0:07:08.320 a trench war and it's going to be long, and 0:07:08.360 --> 0:07:11.160 it's gonna be hard. And just to sort of extrapolate out, 0:07:11.160 --> 0:07:13.120 when you talk about a blood bath, are you talking 0:07:13.160 --> 0:07:16.560 about steep discounts that will end up eating into the 0:07:16.560 --> 0:07:20.040 bottom line, expenditures for distribution networks that are going to 0:07:20.120 --> 0:07:22.640 eat into the bottom line, as well as a losing 0:07:22.680 --> 0:07:24.680 market share which will also eat into the bottom line. 0:07:24.720 --> 0:07:27.600 Is that sort of the trifecta you're viewing again, you 0:07:27.680 --> 0:07:30.560 nailed it, Yeah, I mean that's the trifecta, like that's 0:07:30.560 --> 0:07:32.200 our big concern as we get to the back half 0:07:32.200 --> 0:07:36.640 and I actually add one more labor costs rising rapidly 0:07:37.320 --> 0:07:39.760 UM and so this is an issue for the companies too. 0:07:39.840 --> 0:07:42.360 So you know the theme, it's just costing more to 0:07:42.360 --> 0:07:45.760 do business. Returns are coming down, it's harder to generate 0:07:45.800 --> 0:07:50.360 those sales makes and and you know, everyone knows what 0:07:50.400 --> 0:07:54.400 happened last year last holiday period. Everyone's gearing up. These 0:07:54.400 --> 0:07:57.480 businesses can't afford to lose the traffic, to lose the share. 0:07:58.120 --> 0:08:00.120 And if you listen to the Target conference called they 0:08:00.120 --> 0:08:03.440 were they had hints of caution around their fourth quarter 0:08:03.880 --> 0:08:05.840 because they know they've got to keep the traffic. They 0:08:05.880 --> 0:08:08.200 know they've got to keep the share, and one of 0:08:08.200 --> 0:08:10.400 the best ways to do that is to get more promotional, 0:08:10.480 --> 0:08:13.600 get more aggressive, throw more labor at the stores. UM. 0:08:13.640 --> 0:08:16.560 So we're not looking for a very you know, a 0:08:16.640 --> 0:08:19.720 very good fourth quarter out of retail um. You know, 0:08:19.760 --> 0:08:22.239 the one saving grace. Maybe the economy. Economy is definitely 0:08:22.240 --> 0:08:24.720 picked up. Maybe that will will help, but will it 0:08:24.720 --> 0:08:28.960 be enough. Scott Mushkin with some rather sobering words about 0:08:29.000 --> 0:08:31.680 the entire retailer industry. Scott Mushkin is managing director and 0:08:31.720 --> 0:08:47.240 senior Staples Retail and US at Wolf Research in New York. Well, 0:08:47.280 --> 0:08:49.600 they might be expressing concerns about aluminium, but they are 0:08:49.600 --> 0:08:54.960 certainly not expressing concerns about bitcoin. Bitcoin has surged eighty 0:08:55.240 --> 0:08:59.840 nine percent since mid July, shocking rally that has some 0:09:00.240 --> 0:09:02.880 scratching their heads and wondering how long this can last. 0:09:03.120 --> 0:09:06.000 Josh Deppman joins US now he's president of Fintech Investment 0:09:06.080 --> 0:09:09.160 Group UH and Josh, I want to get your sense 0:09:09.200 --> 0:09:13.160 of what exactly has been behind the acceleration in the 0:09:13.240 --> 0:09:16.959 rally and bitcoin that we've seen over the past few weeks. Well, personally, 0:09:17.000 --> 0:09:21.040 I believe that bitcoin is an excellent store of value, 0:09:21.080 --> 0:09:23.959 and people are starting to realize that with the stock 0:09:24.000 --> 0:09:26.920 market at all time highs, no interest rate in any 0:09:26.960 --> 0:09:31.640 bearing securities, that bitcoin actually can serve as an impetus 0:09:31.720 --> 0:09:34.840 to go even higher and maybe even two five thousand 0:09:34.840 --> 0:09:36.920 by the end of this month, And currently it is 0:09:37.000 --> 0:09:42.200 at about four thousand, So it's you're expecting it to 0:09:42.240 --> 0:09:45.440 climb another good chunk by the end of this month. 0:09:45.720 --> 0:09:47.160 You know, I hear what you're saying, and this is 0:09:47.200 --> 0:09:49.120 something that a lot of people have said, which is 0:09:49.600 --> 0:09:52.560 as central banks seek to devalue their currencies are at 0:09:52.640 --> 0:09:56.880 least buy assets and in parking these stimulus efforts, that 0:09:57.040 --> 0:10:00.600 why not go into a cryptocurrency that's backed by uh, 0:10:00.600 --> 0:10:04.760 this sort of blockchain technology in this sense of sort 0:10:04.760 --> 0:10:09.000 of communal creation of what it means to have a currency. 0:10:09.040 --> 0:10:11.320 At the same time, nothing really has happened in the 0:10:11.360 --> 0:10:14.280 past few weeks to sort of, uh indicate that it's 0:10:14.320 --> 0:10:16.480 more of a good time to go into this than 0:10:16.600 --> 0:10:19.520 than in the past. Right. Well, I mean, you know, 0:10:19.559 --> 0:10:22.160 the key is that it is a store of value, 0:10:22.400 --> 0:10:24.280 that there is a limited supply. And one of the 0:10:24.320 --> 0:10:27.360 things that's great about bitcoin, uh is that you know, 0:10:27.440 --> 0:10:30.280 it is a kind of a ubiquitous coin even though 0:10:30.320 --> 0:10:32.280 that it you know, it does have a limited amount 0:10:32.280 --> 0:10:34.199 that can be there. People have heard of it, People 0:10:34.240 --> 0:10:36.840 know of it, and there's more and more adoption in 0:10:36.960 --> 0:10:40.600 retail and businesses that are willing to take bitcoin. You pay, 0:10:40.400 --> 0:10:43.120 you pay your employees in bitcoin, right, yeah, we do. 0:10:43.240 --> 0:10:45.160 They have that option, yes, and the ones that have 0:10:46.120 --> 0:10:48.880 received their paying bitcoin are much more happy than the 0:10:48.880 --> 0:10:52.400 ones who have taken the fiat currency lately. Do you 0:10:52.160 --> 0:10:57.400 do you personally spend bitcoin at retailers? Uh? We do um, 0:10:57.440 --> 0:11:00.120 you know, in where I live in the land or 0:11:00.160 --> 0:11:03.600 that there aren't a lot of places that accept bitcoin. 0:11:04.360 --> 0:11:05.920 But when we're on the road, you know, if if 0:11:05.960 --> 0:11:08.839 there's an ability to pay for it in bitcoin, we do, 0:11:09.960 --> 0:11:12.520 so I have to wonder, you know, A big question 0:11:12.559 --> 0:11:15.960 mark about bitcoin is, yes, there might be a limited 0:11:16.080 --> 0:11:20.880 store of the cryptocurrency, but nothing's backing it and it's 0:11:20.920 --> 0:11:26.080 not adopted by any nation. And normally a currency is 0:11:26.080 --> 0:11:28.560 thought to be something that is backed by the good 0:11:28.600 --> 0:11:33.600 faith and the economic engine of a country. That's not 0:11:33.640 --> 0:11:36.280 the case here. Well, no, it isn't. And quite frankly, 0:11:36.320 --> 0:11:39.880 the cryptocurrency is kind of a misnomer. Uh. These are 0:11:40.000 --> 0:11:43.840 these are commodities, these are digital assets. There's no ownership, 0:11:44.400 --> 0:11:46.400 you don't have voting rights. There's a lot of things 0:11:46.440 --> 0:11:49.120 that you don't have with bitcoin that you would say 0:11:49.120 --> 0:11:51.760 in a security like you know, shares of Microsoft or 0:11:51.760 --> 0:11:55.319 what have you. However, because there is a limited avout 0:11:55.360 --> 0:11:58.040 of value and there is no central government that could 0:11:58.080 --> 0:12:02.280 come in and uh mess around with changing rates, adding liquidity, 0:12:02.360 --> 0:12:06.719 taking away liquidity. Uh, there is a certain stability with 0:12:06.840 --> 0:12:10.240 that model that lends itself for some trust and some 0:12:10.280 --> 0:12:13.480 beliefs and Uh. I think that's why people are migrating 0:12:13.520 --> 0:12:17.200 to it, because they see what a disaster the central 0:12:17.240 --> 0:12:20.240 banks have become. And you know, anything that's regulated by 0:12:20.280 --> 0:12:23.440 the government has a tendency to uh just become more 0:12:23.480 --> 0:12:25.280 and more regulated. You know. I take issue with the 0:12:25.360 --> 0:12:28.600 idea that the central banks have become disasters because some 0:12:28.679 --> 0:12:30.960 would say that they stepped in and they prevented another, 0:12:31.320 --> 0:12:35.480 uh financial crisis that was at least another great recession, 0:12:35.520 --> 0:12:38.280 great depression, as as what we saw in the thirties. 0:12:38.320 --> 0:12:40.040 So you know, I mean some people could say that 0:12:40.080 --> 0:12:41.640 they did what they needed to do and we haven't 0:12:41.640 --> 0:12:46.040 seen rampant inflation and the economy has continued to grind higher, 0:12:46.200 --> 0:12:49.160 So you know, there is this feeling. Yes, central banks 0:12:49.160 --> 0:12:52.199 have certainly stepped into the markets and it propped them 0:12:52.240 --> 0:12:54.800 up in a big way. But I do have to, 0:12:55.120 --> 0:12:57.000 uh take issue with that. And I also have to 0:12:57.080 --> 0:12:58.800 question one other thing that you're you're saying, which is 0:12:58.920 --> 0:13:04.079 ubiquitousness of bitcoin. I have yet to see a retailer 0:13:04.080 --> 0:13:06.000 that has a sign up that says we accept bitcoin. 0:13:06.120 --> 0:13:09.520 Where is this cryptocurrency ubiquitous and sort of where is 0:13:09.520 --> 0:13:11.680 it accepted? That sort of gives you the sense that 0:13:11.720 --> 0:13:14.000 it's a long lasting I mean, you can buy stuff 0:13:14.040 --> 0:13:18.280 on on overstock, dot com, Virgin Atlantic, Dell Computers, Starbucks 0:13:18.320 --> 0:13:22.880 has uh venues where you can pay in bitcoin. Um, 0:13:22.920 --> 0:13:26.440 there will be more uh And and if if the 0:13:26.760 --> 0:13:29.760 segment that's happening is coming out, it's going to allow 0:13:30.080 --> 0:13:34.079 the transaction time to be greatly increased, and then therefore 0:13:34.480 --> 0:13:37.160 it'll be a lot easier to pay in bitcoin. Uh. 0:13:37.200 --> 0:13:39.000 And that's something that's coming up here in the next 0:13:39.040 --> 0:13:41.200 month or so. And if if that happens, which we 0:13:41.240 --> 0:13:44.000 believe it will, we believe they'll be even more increased 0:13:44.040 --> 0:13:48.080 acceptance of bitcoin. In other words, if people can transact 0:13:48.120 --> 0:13:50.480 with bitcoin, not only can they do it more quickly, 0:13:50.520 --> 0:13:53.559 but also I assume the settlement and the back office 0:13:53.640 --> 0:13:56.240 costs will also be reduced. Correct, That is correct. So 0:13:56.320 --> 0:13:59.079 that's a big piece of it as well. Right, absolutely, So, 0:13:59.360 --> 0:14:01.120 are more of your eployees asking to be paid in 0:14:01.160 --> 0:14:04.160 bitcoin these days? Yes? They are? What proportion of your 0:14:04.160 --> 0:14:08.240 employees are paid in bitcoin? Uh? Probably, um, you know, 0:14:08.280 --> 0:14:11.800 and we we allow them, um, you know, to access 0:14:11.840 --> 0:14:16.240 coins that that we mind ourselves. Uh. And basically we 0:14:16.440 --> 0:14:19.320 think that uh, you know, at least for the time 0:14:19.360 --> 0:14:22.200 being we think that the more more are going to 0:14:22.240 --> 0:14:24.640 be paid in bitcoin. Josh Detman, thank you so much 0:14:24.680 --> 0:14:27.520 for joining me. Uh, such an interesting area. I'm looking 0:14:27.560 --> 0:14:29.400 at the chart right now. It is a kind of 0:14:29.440 --> 0:14:32.720 mind blowing to see the rally. It looks like a 0:14:32.840 --> 0:14:36.800 rocket taking off of bitcoin's value. Josh Dettman as president 0:14:36.840 --> 0:14:40.640 of Fintech Investment Group in Florida. And we will keep 0:14:41.000 --> 0:14:43.920 talking about bitcoin, but not only bitcoin, but also uh 0:14:43.960 --> 0:14:46.480 the blockchain technology behind it that is being adopted by 0:14:46.520 --> 0:15:01.520 more big investment firms. So yesterday we were talking about 0:15:01.560 --> 0:15:04.400 the retail sales and how the U as a consumer 0:15:04.440 --> 0:15:07.720 appears to be in really good shape. And then we 0:15:07.840 --> 0:15:12.640 get this from our own Adam Tempkin, a story about 0:15:12.720 --> 0:15:17.320 how deep subprime auto loans are experiencing delinquencies at the 0:15:17.400 --> 0:15:21.120 fastest pace since the crisis. That sounds bad. Adam Tempkin 0:15:21.240 --> 0:15:23.880 joins us now to explain what's behind this and how 0:15:23.920 --> 0:15:26.360 concerning this really is. Adam Tompkin is a credit markets 0:15:26.360 --> 0:15:28.800 reporter here at Bloomberg News. So Adam, let's just get 0:15:28.840 --> 0:15:32.400 a big picture sense of what the delinquency rate is 0:15:32.920 --> 0:15:36.840 and just the backdrop for deep subprime auto loans, which 0:15:36.880 --> 0:15:40.360 to my recollection are at the highest proportion of overall 0:15:40.480 --> 0:15:43.680 subprime auto loans that they've ever been. That's right, even 0:15:43.680 --> 0:15:45.720 though subprime as a whole is decreased a little bit, 0:15:45.880 --> 0:15:49.880 deep subprime, which is a what what equifox calls advantage 0:15:49.920 --> 0:15:51.720 score which is similar to FI GO of less than 0:15:51.760 --> 0:15:56.680 five thirty, has actually increased, and the delinquency rate for 0:15:56.720 --> 0:16:00.240 those least credit worthy borrowers it's as high as was 0:16:00.320 --> 0:16:04.080 for loans originated in OH seven and O eight um. 0:16:04.160 --> 0:16:07.440 And those credit scores are about the same, you know, 0:16:07.600 --> 0:16:10.200 that range bound five thirty or less, But yet the 0:16:10.240 --> 0:16:12.840 performance of the loans is getting worse for those people. 0:16:13.160 --> 0:16:15.240 So what does this mean? Does this mean that the 0:16:15.280 --> 0:16:19.640 originators of these loans were irresponsible or a little bit 0:16:19.720 --> 0:16:22.760 lax with their lending standards. Does this mean that perhaps 0:16:22.760 --> 0:16:25.520 the American consumer isn't as in good shape as people 0:16:25.560 --> 0:16:29.000 had expected, or is this a comment on the underlying 0:16:29.720 --> 0:16:32.120 value of the car? I mean, what's your takeaway from this? Well, 0:16:32.160 --> 0:16:36.080 equifox feels that this is really about shifting market share 0:16:36.280 --> 0:16:39.840 in the auto loan market. So basically, you had three 0:16:39.960 --> 0:16:43.680 kind of newish players post crisis that got into subprime 0:16:43.760 --> 0:16:48.760 lending dealer finance companies, mono lines and independent finance companies 0:16:48.800 --> 0:16:51.640 mino lines. To be clear, our bond in chures right, No, no, no, 0:16:51.680 --> 0:16:53.680 this is a different type of mono line. These are 0:16:53.800 --> 0:16:58.200 if that's recollection from the crisis ere These are sort 0:16:58.200 --> 0:17:02.400 of non bank lenders, but they don't have a parent company. 0:17:02.440 --> 0:17:05.000 They're just doing their own thing, so that distinguishes them 0:17:05.000 --> 0:17:09.560 from what they call captive of finance companies. The captive 0:17:09.600 --> 0:17:11.399 finance are like the Ford or GM when they have 0:17:12.840 --> 0:17:14.800 and these other the model line, as you say, are 0:17:14.880 --> 0:17:19.600 independent companies that finance themselves with what we basically securities 0:17:19.720 --> 0:17:22.720 or yes, all these deep subprime lenders that have entered 0:17:22.720 --> 0:17:27.520 the market and through competition have loosened underwriting since the crisis. 0:17:27.800 --> 0:17:30.879 They tend to fund themselves through asset back securities. But 0:17:31.000 --> 0:17:34.040 mind you, it's still a very small proportion of the 0:17:34.119 --> 0:17:37.199 overall auto lending market. So what you have is you 0:17:37.240 --> 0:17:41.639 have on one hand, banks, credit unions and um, you know, 0:17:42.000 --> 0:17:46.480 finance companies with parent companies doing very concervative underwriting since 0:17:46.520 --> 0:17:51.199 the crisis, and that's or more of overall auto lending. 0:17:51.520 --> 0:17:54.359 And then you have mono lines, independent finance companies and 0:17:54.400 --> 0:17:57.879 dealer finance. They're doing a lot of subprime, and they're 0:17:57.920 --> 0:18:01.320 getting their going down the credit spect from and they're 0:18:01.359 --> 0:18:03.959 doing a lot of this subprime and deep subprime lending. So, 0:18:04.000 --> 0:18:05.840 you know, here's a dilemma that I've been thinking about 0:18:05.840 --> 0:18:08.280 a lot because we have been hearing about problems within 0:18:08.320 --> 0:18:10.920 the auto lending sector for a while that perhaps things 0:18:10.920 --> 0:18:14.760 got out of control. Uh. The amount of auto related 0:18:14.920 --> 0:18:17.959 dead outstanding in the US has reached an all time high. 0:18:18.000 --> 0:18:21.359 You have people who are like pulling back and tightening standards, 0:18:21.400 --> 0:18:25.879 like Wells Fargo. Um. But I'm wondering how much this 0:18:25.960 --> 0:18:29.760 is idiosyncratic to the auto industry and the auto lending 0:18:29.880 --> 0:18:33.879 sector versus the overall consumer, because we are also seeing 0:18:33.920 --> 0:18:39.000 an uptick intolinquencies among credit cards, uh, credit card dead um. 0:18:39.040 --> 0:18:41.760 And you are seeing, although to a smaller extent, you're 0:18:41.760 --> 0:18:45.919 seeing a little bit of a weakening within higher rated borrowers, 0:18:45.960 --> 0:18:49.040 more credit worthy borrowers as well with their auto loans. 0:18:49.080 --> 0:18:51.160 So you know, when you talk to analysts, are they 0:18:51.280 --> 0:18:56.000 concerned about a broader base weakening of the consumer? Well, 0:18:56.040 --> 0:18:59.280 I spoke to you Equifox's chief economist Amy cottson she 0:18:59.320 --> 0:19:03.159 didn't think so she thinks that this is idiosyncratic to 0:19:03.359 --> 0:19:06.879 the auto market and shifting. Um, you know, basically the 0:19:07.160 --> 0:19:11.679 auto ending market has shifted towards these newer entrants that 0:19:11.760 --> 0:19:15.119 are willing to take on the risk. These like the monolnes, 0:19:15.200 --> 0:19:16.440 the deal you know, can you give us some names 0:19:16.440 --> 0:19:20.040 of them the companies, Yeah, like Westlake, Exeter, Scopos. And 0:19:20.080 --> 0:19:23.040 by the way, these are all asset backed securities issuers, 0:19:23.119 --> 0:19:26.359 and you know those deals, those bonds are protected. But 0:19:26.400 --> 0:19:28.800 when you think about the actual borrower, you know, it's 0:19:28.840 --> 0:19:32.000 not a great situation. Uh. The way that this happens 0:19:32.040 --> 0:19:35.479 is when cars are repossessed. Um, you know, the lenders 0:19:35.480 --> 0:19:37.480 try to get money back when people are not paying 0:19:37.520 --> 0:19:41.920 their their loans. However, use car prices are going down, 0:19:42.359 --> 0:19:46.159 so interest rates are going up. So I have to wonder, 0:19:46.359 --> 0:19:49.199 you know, who's feeling this pain right because somebody's not 0:19:49.200 --> 0:19:51.439 getting their money paid back. If you're seeing more delinquencies 0:19:51.440 --> 0:19:54.560 and more losses. Are people who hold the bonds that 0:19:54.600 --> 0:19:57.280 are backed by these auto loans? Are they starting to 0:19:57.320 --> 0:20:00.679 see losses? Are the actual companies, the monol lines, as 0:20:00.680 --> 0:20:05.480 you say, are the independent independent financing units, Are they 0:20:05.840 --> 0:20:09.800 feeling pressure or threatening bankruptcy or is this just all 0:20:09.880 --> 0:20:11.920 kind of going out in the wash because the yields 0:20:11.920 --> 0:20:13.919 are so high anyway on these things. Well as far 0:20:13.960 --> 0:20:16.439 as the asset backed bonds, which again a lot of 0:20:16.440 --> 0:20:19.560 this deep subprime stuff goes into these asset backed bonds, 0:20:19.640 --> 0:20:23.000 those happen to be very well protected with you know, 0:20:23.119 --> 0:20:27.719 credit enhancement and you know other overcollateralization, other protections. So 0:20:27.960 --> 0:20:30.959 bond investors have not really been feeling it, despite the 0:20:31.000 --> 0:20:34.800 fact that delinquencies have been rising. But you know, you 0:20:34.880 --> 0:20:37.960 have your poorer borrowers, first of all, on the hook 0:20:38.040 --> 0:20:40.800 for loans that that can't pay back, and often the 0:20:40.800 --> 0:20:43.080 car has already been been repossessed. And I will say, 0:20:43.080 --> 0:20:45.240 and this is an undertold story, but some of these 0:20:45.280 --> 0:20:49.160 borrowers of these uh consumers are paying rates of what 0:20:49.320 --> 0:20:55.600 like or more on these loans, which is crazy, very 0:20:55.720 --> 0:20:58.680 very high, and they're underwater because their car no longer 0:20:58.760 --> 0:21:01.600 is worthwhile. So probably they're going to be uh, probably 0:21:01.600 --> 0:21:04.639 suffering the most in all of this. Adam Tompkin, thank 0:21:04.640 --> 0:21:07.160 you so much for joining us. Really uh, really informative. 0:21:07.160 --> 0:21:10.200 Adam Tompkin is a structured finance reporter for Bloomberg. We're 0:21:10.200 --> 0:21:13.439 talking about deep subprime auto loans. This is a small 0:21:13.480 --> 0:21:16.960 portion of the overall auto lending sector, about forty billion dollars, 0:21:16.960 --> 0:21:19.199 but still very important as sort of a gauge of 0:21:19.240 --> 0:21:35.639 the temperature in consumer credit worthiness. When we're looking on 0:21:35.680 --> 0:21:38.480 our computers or at work, a lot of people don't 0:21:38.520 --> 0:21:41.320 think about all of the back office support that goes 0:21:41.400 --> 0:21:46.680 into storing, maintaining the data, enabling conferences that are virtual 0:21:46.720 --> 0:21:50.000 with other people. But it is actually a massive business. 0:21:50.000 --> 0:21:52.600 And here to tell us more about that is Stephen Smith, 0:21:52.680 --> 0:21:55.960 chief executive officer and president of Equinix. We're also joined 0:21:56.119 --> 0:21:59.040 by Josh Yatskoitz. He's a media and cable analyst for 0:21:59.240 --> 0:22:02.320 Bloomberg in intelligence and Stephen, I wanted to start with you. 0:22:02.440 --> 0:22:06.479 So Equinis was formed, which seems rather prescient frankly, because 0:22:06.600 --> 0:22:10.000